Decree encouraging individuals to adopt company structures raises questions and problems that are still being resolved

Tax incentives often appear attractive in theory, but the reality of attempting to claim them can often cause difficulties for taxpayers.

Such has been the case with attempts to promote the conversion of businesses traditionally operated by those liable only for personal income tax (PIT) -- individuals, non-juristic ordinary partnerships and groups of persons -- into corporate entities such as a company limited or registered partnership. The ultimate goal is to encourage and better monitor tax compliance.

To this end, the government issued Royal Decree No.630 (RD 630) to exempt PIT, value added-tax (VAT), specific business tax (SBT) and stamp duties for individuals who made the conversion by means of transferring assets and goods used in their businesses to a newly incorporated company or registered partnership. The transactions otherwise would have been subject to taxes as for a sale.

The decree has now expired, although there are reports that an extension to the end of this year is being considered to give individuals one last chance before possibly facing a tough tax audit.

The notification of the Revenue Department director-general issued under the decree requires that, in order for tax incentives to apply, the assets transferred must have been utilised in the individual's business, and the transfer must be made in exchange for new shares issued by the new company.

Further, the individual undertaking the transfer must receive the shares with a value that is not less than the transferred assets. In the case of immovable properties, the value of the shares must be equal to the value of the properties appraised by the Land Department, or the cost price, whichever is greater. In claiming the tax incentives, the individual and the new company had to submit declaration forms to the Revenue and Land departments.

This type of business transfer often involves not only the two main parties to the transaction, namely the transferor and the transferee, but also other stakeholders through contracts with trade partners. Some properties may be subject to mortgages or held as loan collateral, in which case the financial institution may demand early repayment in exchange for the release from encumbrances before the transfer can be registered.

Difficulties could also arise with immovable properties owned by several individuals if some wish to convert the joint business into a new company while others would prefer to maintain the status quo. The transformation under this scenario may not be entirely tax-free, so one must consider which parts of the properties are eligible for privileges. For the portion that is not qualified, there may be a recapture of the taxes. In this regard, the Revenue Department advised in a recent ruling as follows:

n Where all co-owners of immovable properties transfer all of their ownership interest in exchange for the registered capital of a new company, they would be entitled to the tax exemptions granted under RD 630.

n Where only one co-owner transfers ownership, in order for such individual to benefit from the tax exemption, "his ownership portion of immovable property must firstly be separated from the common ownership before the transfer to the new company".

The trouble here is that this interpretation was issued after the deadline for transfers expired, and imposes a new requirement that was not mentioned in RD 630 or in any notification.

Such a requirement is impractical because, in order to separate the co-owned properties at the Land Department, the official must conduct a cadastral survey to divide the properties, which normally takes around three months. In any case, settlement among the co-owners could take forever.

It is understandable that the Revenue Department may not want a newly set-up company to become a co-owner of such properties with the remaining individuals, since co-ownership and joint use could constitute an unincorporated joint venture between the new company and the remaining individuals -- similar to a non-juristic ordinary partnership from a tax aspect. But what else could taxpayers do to solve this problem if the properties have already been transferred and this condition just came out recently?

Further, another revenue ruling dealt with an interesting question from an individual: if an asset was utilised in a business before the transfer, must the new company carry on the same line of business, or could it operate other businesses? The department responded: "In order for the individual taxpayer to be entitled to the exemptions for the transfer of assets and goods under RD 630, the new company must carry on the same line of business that had been operated by the individual before the conversion." In short, business continuity is the key to the tax privileges.

Theoretically, this is a rational requirement so that the tax exemptions will be granted only for a genuine business conversion. However, as it was never mentioned in RD 630 and in the subsequent notification, a few taxpayers may have missed it and an audit could be catastrophic for the taxpayer.

Most importantly, the department has never made it clear how long the original business must be maintained, as the business in the hands of the new company may need to be changed, depending on commercial needs.

If indeed the government follows through and extends the deadline for business conversions, it should certainly use this opportunity to clear up these problems.

By Rachanee Prasongprasit and Professor Piphob Veraphong of LawAlliance Limited. They can be reached at admin@lawalliance.co.th

Last year we were treated to some tortuous legal arguments about whether the Revenue Department could try to collect tax from former prime minister Thaksin Shinawatra on a share sale, even if it was made through the stock market, based on a summons issued to his son many years ago.

A senior cabinet minister admitted at the time that such an attempt would need to rely on a "miracle of law", but the government is intent on pursuing the case no matter how many more years it takes. One interesting question arises: could the taxman apply a similar concept to assess a taxpayer based on a summons served on his or her spouse?

While taxpayers are entitled to defend against all tax claims, evidence goes stale and witnesses' memories get hazy with the passage of time. To be fair to them, the statute of limitations imposes a timeframe within which tax authorities need to exercise their power diligently.

Where income tax is concerned, if an official suspects errors in a tax return, the Revenue Code requires that he or she must "issue a summons to the person who filed such tax return" for audit purposes within two years from the day the return was filed. The deadline can be extended to five years if tax evasion is suspected, or if a tax refund is being contested. In a case where no tax return has been filed, the law does not really impose any deadline and the general rule of 10 years will apply instead.

After issuing a summons and conducting an audit, tax authorities may decide to issue a tax assessment letter, which will empower them to confiscate assets without having to petition for a court order.

Cases arise from time to time in which a deadline expires and tax authorities are unable to issue a summons directly to the correct person. Can the Revenue Department actually rely on a summons issued to a taxpayer's spouse in order to pursue an assessment against the taxpayer? If this happened to you, what legal arguments could you use to defend yourself?

In other words, can a spouse, who receives a summons related to his or her own tax matter, be treated as an "agent" of the taxpayer simply because the Revenue Code contains a provision that requires the incomes of married persons to be itemised in the same tax return?

In one precedent case, the department assessed tax against a politician and subsequently claimed that the summons issued to him could be treated as a summons issued to his wife, so that it could assess tax against her as well. This assertion was based on the provision in the Revenue Code (modified in 2013), which treats the income earned by a wife as her husband's for tax purposes. The same provision holds the husband liable for the wife's tax, together with a tax return filing on her account.

The court rejected the taxman's argument. It said: "The purpose of such a provision in the Revenue Code was only to identify the person who was liable to pay and file tax. The law still requires the tax assessment official to issue a summons so as to allow the taxpayer to understand the potential liabilities of the tax assessment. As the assessment official failed to issue a summons to the wife for inquiries, the tax assessment on the wife, including the ruling by the Appeal Committee in favour of the Revenue Department, was not legitimate."

To be fair, the Revenue Department is not only one that has tried the "agent" argument. In another Supreme Court case, a taxpayer who had failed to file a return and pay taxes for 2001 was assessed by the department. The man asserted that, since his wife had filed her tax return, by declaring in Form PND 90 that he had no income on which to pay tax, it meant that he had already filed via his wife's return. Consequently, he argued, the Revenue Department's issuance of a summons to him after two years from the deadline, based on the 10-year rule for a taxpayer who fails to file a return, was not legitimate.

The Supreme Court threw out this argument as well. It said: "Since the tax return filing of a wife, with a declaration that her husband had no income, could not be counted as the husband's tax return filing, the Revenue Department's issuance of a summons was legitimate."

In the department's case against the former prime minister, based on the sale of shares by his children in 2006, it failed to serve a summons on him by March 31, 2012 (five years from March 31, 2007, the tax filing deadline in question) but claimed the summons had already been issued to him within the five-year deadline via his children. This, it said, was based on the judgement of the Supreme Court's Criminal Division for Holders of Political Positions that Thaksin's children had sold shares for his benefit.

Whether the above interpretation is correct or not, it seems that where there is no related precedent case stating that the person receiving a summons can include a nominee or an agent, the Revenue Department appears bound by law to issue a summons within the deadline directly to a person against whom it intends to assess tax.

Written by Rachanee Prasongprasit and Professor Piphob Veraphong of LawAlliance Limited.

Most people understand that the discharge of a debt by a creditor, or by someone else for the benefit of a debtor, could result in the debtor having taxable income equivalent to the amount of debt discharged. Likewise, when a buyer undertakes to pay off a sellerâ€™s debt in exchange for goods or services, the sum of debt released will be treated as part of the sale revenue received by the seller. On the buyerâ€™s side, the same sum will be treated as acquisition costs for income tax purposes.

Based on this principle, the Revenue Department issued Instruction Por 82/2542 concerning the calculation of specific business tax (SBT) on the sale of immovable property. Clause 6(3) states that when a sale of mortgaged land is registered with the Land Department, the amount of â€śmortgage liabilityâ€ť shall be included in gross receipts and subject to SBT at the rate of 3.3%.

For example, if a plot of land, with a fair market value of 230 and mortgage liability of 130, is sold in exchange for 100 in cash, the total price for tax purposes is equal to the sum of the released mortgage (130) and the cash received (100), or 230. This seems straightforward and there should be no interpretation issue.

To register the ownership transfer, the buyer and seller need to use the one-page purchase and sale agreement form provided by the Land Department. Because space on the form is limited, there is little chance to explain many details, so only brief summaries are possible in each paragraph. This can be a problem leading to double taxation on the released mortgage.

In one precedent case, the parties filled in the following information on the one-page form for registering the ownership transfer:

1. The purchase and sale price is 230;

2. The seller has already received full payment; and

3. The buyer will undertake to carry over the mortgage liability of the seller.

As the seller was receiving a monetary benefit of 230, comprising cash of 100 and mortgage release of 130, it calculated net profit tax and paid SBT on the total consideration amount of 230.

However, Revenue Department officials had a different calculation in mind. They claimed that as the price stated in clause 1 was 230 and the parties had confirmed â€śfull paymentâ€ť in clause 2, it meant the mortgage release in clause 3 was a separate item and must be added to the sale price, making the total consideration 230+130 = 360. As such, both net profit tax and SBT must be calculated based on 360 rather than 230, effectively resulting in double taxation of the mortgage release.

To most people, this would appear to be a minor miscommunication between the taxpayer and the taxman. If both parties are acting honestly, any discrepancy could be resolved by supporting evidence. This could include as a bank deposit/transfer slip proving the actual cash amount paid, bank confirmation of the mortgage amount released, sellerâ€™s profit and loss account showing the actual sale revenue, buyerâ€™s records showing the actual acquisition cost, and confirmation by a licensed auditor of the total consideration. The figures can be reconciled to confirm the total value of the transaction.

In the course of a tax audit, the seller presented the necessary documents to prove that the released mortgage was already included and the amount in clause 1 stated the total consideration. Unfortunately, the tax authorities refused to budge from their position. They insisted that the one-page purchase and sale agreement was an official document binding both parties and was, therefore, the most reliable evidence. As well, they claimed that Por 82/2542 required the mortgage liability in clause 3 to be included in the amount in clause 1, resulting in a total taxable amount of 360.

Sadly, the Board of Appeal, which should have corrected the erroneous tax assessment, agreed with the taxman by looking only at the one-page document of the Land Department.

The Tax Court ruled that the seller had never disputed that the amount of the released mortgage must be included in the tax base pursuant to the terms of Por 82/2542, but the seller was able to prove beyond doubt that the mortgage amount in clause 3 was already included in the total sale price in Clause 1 and subject to all taxes. Hence, the tax assessment was voided. But the Revenue Department is not finished, and the matter has now gone to the Court of Appeal.

What does this precedent case tell us? Not much from a tax policy point of view. However, from a risk management perspective, it does offer a few lessons.

First, you need to be very careful when you produce an official document, as someday it could come back and hurt you. Second, when tax authorities want to attack you, no matter how good your supporting documents are, they will simply ignore them and pretend to rely solely on the â€śofficialâ€ť documents. Hence, never omit even the smallest item in a document. Choosing a capable person to handle the transfer registration will also reduce the incidental risk.

The most important lesson, however, is the moral of the story. This tax dispute should never have arisen if everyone in the system had performed their duties with integrity, transparency and justice.

By Professor Piphob Veraphong and Rachanee Prasongprasit of Law Alliance Limited. They can be reached at admin@lawalliance.co.th

The new double-taxation agreement between Thailand and Cambodia officially took effect on Jan 1 for withholding tax and corporate income tax. The two countries only signed the agreement on Sept 7 last year but rushed to complete the ratification process on Dec 26. This super-fast track is a part of a consolidated strategic action plan for the Asean Economic Community (AEC) to support regional competitiveness.

The Agreement between Thailand and Cambodia for the Avoidance of Double Taxation, as it is formally known, is of great interest to Thai businesses given the scale of their investments in the neighbouring country. These include businesses ranging from banking, construction and power production to telecommunications, hotels and resorts, entertainment, hospitals and wellness.

Cambodia has one of the most business-friendly investment regimes in Asia. Full foreign ownership is allowed for any business, with foreign businesses receiving the same treatment as their local counterparts. There are no legal requirements on local content of goods, or for price and label controls. Consequently, Cambodia can be a good logistics base for Thai investors.

Thai companies that qualify: Similar to most tax treaty models, the new DTT grants benefits only to a resident of Thailand and Cambodia. In the case of a Thai corporate entity, "resident" means those liable to tax in Thailand by reason of "place of incorporation, place of management, principal place of business or any other criterion of a similar nature". A company that pays Thai tax merely by reason of having income sourced in Thailand is generally not considered a tax resident and therefore not eligible.

Unlike old tax treaties, the DTT makes it very clear that state and local authorities of both countries are also considered tax residents for the purpose of DTT benefits even if they do not pay tax in that country. This will help eliminate interpretation disputes.

In determining tax residency status, regardless of what a treaty states, Thai tax authorities tend to focus solely on the place of incorporation, while Cambodian tax practitioners view the place of management and principal place of business as the key. The DTT features a tiebreaker which clearly states that where a company is a tax resident in both countries at the same time, the place of incorporation will prevail in determining tax residency status.

Permanent Establishment or PE: A Thai company carrying on business in Cambodia will be deemed to have a PE in Cambodia and pay Cambodian income tax where there is a building site, construction, installation or assembly project, or related supervisory activities for more than six months. For other service activities, if the same or related project continues in Cambodia for more than an aggregate period(s) of 183 days during any 12-month period, it will constitute a PE and trigger tax in Cambodia.

For exploration or exploitation of natural resources including the operation of substantial equipment, an aggregate period(s) of more than 90 days within any 12-month period will be sufficient to create a PE. Notwithstanding, the PE provisions of the treaty do have some unique features, for example:

While the use of facilities and maintenance of a stock of goods solely for the purpose of delivery are clearly excluded from the PE definition, having an agent that habitually maintains inventory in Cambodia from which it regularly delivers goods on behalf of the Thai company could create a PE in Cambodia;

A Thai insurance company that collects premiums from customers in Cambodia through an agent could also be deemed to have a PE in Cambodia; and

For an agent in Cambodia to be treated as a PE for a Thai company, not only must it carry out its activities "wholly or almost wholly" on behalf of the Thai company, but the conditions of the commercial and financial relationship between them must differ from those that would have been made between independent enterprises.

In other words, independent agent status, which will be exempted from the PE tax, will be determined not only by the frequency of activities acting for the Thai company but also by the terms of their engagement.

Withholding tax: Cambodia normally imposes 14% withholding tax on what it deems to be fees paid for "technical services". As Article 13 of the treaty allows Cambodia to continue to collect such tax but at the reduced rate of 10%, whoever plans to export services from Thailand to Cambodia should watch for further clarifications from Cambodian tax authorities.

As for other types of income received by the Thai company, the 10% withholding tax will be applied (reduced from 14%) to the following:

dividends;

interest where the beneficial owner is a financial institution or an insurance company. As the DTT allows the maximum tax rate of 15% to be imposed on other types of entities, the normal rate of 14% will apply in other cases; and

royalties including rents paid for the utilisation of industrial, commercial or scientific equipment;

Capital gains: Article 14 allows Cambodia to collect withholding tax on capital gains from the sale of shares in a Cambodian company. Cambodia currently does not impose tax on such gains, though it imposes a 0.1% registration tax (similar to stamp duty) on the transfer value. Nonetheless, the Thai company is still required to include capital gains earned from the sale of Cambodian shares in its Thai tax base.

Tax-sparing credit: Last but not least, the treaty also offers the elimination of double taxation by way of a credit method -- meaning Thailand must allow a Thai company to use Cambodian tax as a credit against Thai tax as long as the credit does not exceed Thai tax on the amount in question.

The most unique feature of the DTT is that the credit method includes a "tax-sparing credit", which unlike other tax treaties applies not only to dividends but also other income. That is, taxes on any income that is exempted or reduced in Cambodia due to an investment promotion law will continue to be treated as a tax credit as if there had been no such incentives, for a period of 10 years starting from Jan 1 this year.

By Rachanee Prasongprasit and Professor Piphob Veraphong of LawAlliance Limited. They can be reached at

If you face a challenge from tax authorities, remember that the law can protect only those who cooperate with the taxman during the audit process. This applies in all but a few exceptional cases where people can prove they are unable to cooperate in good faith because of circumstances beyond their control.

When an individual or corporate taxpayer fails to file a return, or files a return but an error is suspected, an assessment official can issue a summons to the taxpayer to answer inquiries, and to supply additional documents and evidence, within seven days of receiving the summons.

In cases where a tax return has been filed, a summons can be issued within two years from the filing date. The director-general of the Revenue Department can approve an extension to five years if tax avoidance is suspected, or if a tax refund is at issue. If the taxpayer does not file a return at all, a summons could be issued at any time within 10 years from the filing deadline for the tax year in question.

If an individual taxpayer fails to comply with a summons -- not showing up to be questioned, not answering questions or not producing the requested documents -- officials can issue an assessment letter, negating the taxpayer's right to appeal to either the tax appeal committee or the tax court.

The penalties for uncooperative corporate taxpayers can be very severe financially. Section 71(1) of the Revenue Code authorises officials to assess income tax at 5% of gross revenue -- instead of the normal rate of 20% of net profit.

What if the taxpayer cannot comply with a summons because of external causes? The courts tend to favour the taxpayer if they find "justifiable grounds", and the taxpayer will not lose the right to appeal.

Nevertheless, precedent cases indicate that "justifiable grounds" must be equal, or almost equal to, force majeure or an "act of god". In the absence of compelling proof to justify failure to cooperate with a summons, the court is likely to dismiss the taxpayer's case.

In one case, a taxpayer claimed the required documents had been damaged by termites. In another, a taxpayer submitted a police report saying the documents had been lost but the report did not specifically identify the documents. In both cases the court ruled in favour of the Revenue Department.

Even an act of god might not be accepted if the damage is caused by the taxpayer's own action or non-compliance with other legal requirements. For example, a limited partnership lost its financial and accounting documents in a fire at the warehouse where they were stored. But the law requires such businesses to keep those documents at their place of business, unless they receive permission to move them from the Revenue Department director-general or the accounting chief inspector. This company, the court noted, had no such permission. Clearly, compliance with all legal requirements for record-keeping is a prerequisite in any tax case.

So what constitutes an act of god under Thai tax law? In some rare cases, political events will qualify.

After the violent anti-military uprising of October 1973, key figures in the regime of the day were forced to leave the country, among them Mr A and his family. Later on, a revenue official issued a summons for Mr A to give a statement in his income tax investigation.

Of course, Mr A was unable to participate in the meeting, nor was he able to submit the required documents. The tax assessment notice was subsequently issued to Mr A and his appeal to the tax appeal committee was denied. He brought the case to the court as the last line of defence of his rights.

The Revenue Department asserted that because Mr A did not have the right to appeal against the assessment to the tax appeal committee under sections 21 and 25 of the Revenue Code, his right to appeal to the court was also prohibited.

The court took a different view. It said: "The provision of sections 21 and 25 of the Revenue Code were not so definite as to prohibit the taxpayer from appealing the assessment in all cases where they failed to cooperate with the summons, but such prohibition could apply only where there were no justifiable grounds for non-cooperation.

"

Due to the political situation at the time, Mr A was not allowed to enter Thailand in order to avoid public disorder, rendering him unable to cooperate with the tax audit procedure according to the summons. Also, as Mr A did appeal against the tax assessment and filed the case to the court within the legal deadlines, he had justifiable grounds for failure to cooperate with the summons, and still had the right to file the case to the court."

Based on this fundamental finding, for taxpayers to protect their tax appeal rights, it is necessary to comply with the requirements as specified in a summons during the tax audit process, unless they can come up with very clear proof of justifiable grounds for non-cooperation.

If you face a challenge from tax authorities, remember that the law can protect only those who cooperate with the taxman during the audit process. This applies in all but a few exceptional cases where people can prove they are unable to cooperate in good faith because of circumstances beyond their control.

When an individual or corporate taxpayer fails to file a return, or files a return but an error is suspected, an assessment official can issue a summons to the taxpayer to answer inquiries, and to supply additional documents and evidence, within seven days of receiving the summons.

In cases where a tax return has been filed, a summons can be issued within two years from the filing date. The director-general of the Revenue Department can approve an extension to five years if tax avoidance is suspected, or if a tax refund is at issue. If the taxpayer does not file a return at all, a summons could be issued at any time within 10 years from the filing deadline for the tax year in question.

If an individual taxpayer fails to comply with a summons -- not showing up to be questioned, not answering questions or not producing the requested documents -- officials can issue an assessment letter, negating the taxpayer's right to appeal to either the tax appeal committee or the tax court.

The penalties for uncooperative corporate taxpayers can be very severe financially. Section 71(1) of the Revenue Code authorises officials to assess income tax at 5% of gross revenue -- instead of the normal rate of 20% of net profit.

What if the taxpayer cannot comply with a summons because of external causes? The courts tend to favour the taxpayer if they find "justifiable grounds", and the taxpayer will not lose the right to appeal.

Nevertheless, precedent cases indicate that "justifiable grounds" must be equal, or almost equal to, force majeure or an "act of god". In the absence of compelling proof to justify failure to cooperate with a summons, the court is likely to dismiss the taxpayer's case.

In one case, a taxpayer claimed the required documents had been damaged by termites. In another, a taxpayer submitted a police report saying the documents had been lost but the report did not specifically identify the documents. In both cases the court ruled in favour of the Revenue Department.

Even an act of god might not be accepted if the damage is caused by the taxpayer's own action or non-compliance with other legal requirements. For example, a limited partnership lost its financial and accounting documents in a fire at the warehouse where they were stored. But the law requires such businesses to keep those documents at their place of business, unless they receive permission to move them from the Revenue Department director-general or the accounting chief inspector. This company, the court noted, had no such permission. Clearly, compliance with all legal requirements for record-keeping is a prerequisite in any tax case.

So what constitutes an act of god under Thai tax law? In some rare cases, political events will qualify.

After the violent anti-military uprising of October 1973, key figures in the regime of the day were forced to leave the country, among them Mr A and his family. Later on, a revenue official issued a summons for Mr A to give a statement in his income tax investigation.

Of course, Mr A was unable to participate in the meeting, nor was he able to submit the required documents. The tax assessment notice was subsequently issued to Mr A and his appeal to the tax appeal committee was denied. He brought the case to the court as the last line of defence of his rights.

The Revenue Department asserted that because Mr A did not have the right to appeal against the assessment to the tax appeal committee under sections 21 and 25 of the Revenue Code, his right to appeal to the court was also prohibited.

The court took a different view. It said: "The provision of sections 21 and 25 of the Revenue Code were not so definite as to prohibit the taxpayer from appealing the assessment in all cases where they failed to cooperate with the summons, but such prohibition could apply only where there were no justifiable grounds for non-cooperation.

"

Due to the political situation at the time, Mr A was not allowed to enter Thailand in order to avoid public disorder, rendering him unable to cooperate with the tax audit procedure according to the summons. Also, as Mr A did appeal against the tax assessment and filed the case to the court within the legal deadlines, he had justifiable grounds for failure to cooperate with the summons, and still had the right to file the case to the court."

Based on this fundamental finding, for taxpayers to protect their tax appeal rights, it is necessary to comply with the requirements as specified in a summons during the tax audit process, unless they can come up with very clear proof of justifiable grounds for non-cooperation.

Trying to prove an export of services is quite elusive in respect of time and place, and different parties have different views on what should be considered as exportation for tax purposes. For this reason, the number of problems encountered in applying zero-rated value-added tax (VAT) to services has reached epic levels.

Property funds have long been popular with investors in Thailand, where the mutual-fund structure is being phased out and funds are being converted to real estate investment trusts or REITs. Raising funds from investors through such vehicles often involves a guarantee from the originator to increase confidence in the investment. This can be the starting point for problems on the tax front.

The Revenue Code provides various tools to tax officials to ensure that taxes can be collected with a high level of efficiency. These tools can serve as a double-edge sword, ensuring tax compliance while also imposing punishment on defaulting taxpayers.

You may be surprised to learn that some people do not always claim the preferable tax treatment offered by the government. This is not a surprise to those of us who deal with taxation professionally, as some tax officials interpret the law narrowly and impose extra conditions to prevent abusive transactions based on their understanding or attitudes.

Consequently, some taxpayers would rather play it safe by paying tax first and claiming a refund later. This way, they would avoid the prospect of costly penalties and surcharges should a dispute arise. But a recent court case, in which an individual tried to claim withholding tax on dividends as a final tax, shows that this strategy can backfire.

The Revenue Code explicitly provides that a resident shareholder can opt to leave the 10% withholding tax as a final tax, instead of including dividends as income in tax calculation, on which the progressive tax rates ranging between 5% and 35% would apply. In that case, the taxpayer would not be able to credit the 10% withholding tax against his year-end tax liability.

An individual who includes dividends in gross income is entitled to a dividend tax credit and withholding tax credit. While the withholding tax credit is fixed at 10%, the dividend tax credit is calculated as shown in Part A of the table.

Let's look at the example shown in Part B: A company has a net profit of 100 that is subject to 20% corporate income tax, and distributes all net profits after tax, totalling 80 (100-20) as dividends to its shareholders, from which 10% withholding tax (80x10% = 8) will be deducted and paid to the Revenue Department. The individual shareholder receives a net dividend of 72. If he opts for the dividend tax credit, the shareholder must include as taxable income both the dividend of 80 and the tax credit amount.

As the calculation formula for the dividend tax credit requires the shareholder to know the underlying tax rate, no dividend tax credit will be granted where dividends are distributed out of net profits that are exempted from corporate income tax.

That brings us to the court case illustrated in Part C. Mr A held shares in a holding company (HoldCo), which in turn held shares in a company that had Board of Investment (BoI) privileges (BOICo). BOICo distributed dividends from net profits of 6 million baht, which were tax-exempt during the tax holiday period, both in the hands of BOICo and HoldCo. Thus, when the dividends were distributed to Mr A in 2007, the underlying tax on the dividends was zero.

Due to a misunderstanding, instead of treating the 10% withholding tax as a "final tax", Mr A sought a tax refund by claiming the dividend tax credit and including dividends as income in his year-end tax return.

The Revenue Department detected an irregularity, as no corporate income tax was paid by HoldCo and BOICo. It ordered Mr A to pay additional tax on dividends without any tax credit of approximately 1.3 million baht, together with surcharges, based on the dividend amount appearing in the tax return (for which the effective tax rate was higher than the withholding tax of 10%).

At first Mr A disagreed and appealed. But then, realising his error in interpretation, he cancelled his appeal, a decision supported by the Tax Appeal Committee. Mr A then filed an amended tax return and paid the assessed tax and surcharges. He followed up by filing a second amended return -- on the advice of a tax official -- in which he opted not to include dividends as taxable income, and to leave the 10% withholding tax as final, in order to claim a refund of the assessed tax and surcharges. The Revenue Department rejected his request and the case went to court.

The Supreme Court stated that "due to the cancellation of the tax appeal, the assessment by the Revenue Department had become definitive, thus the tax so assessed must be paid. The later filing of an amended tax return that excluded dividends as income at the year-end could not override the earlier tax assessment".

The court also explained that "where there was an error in tax return filing, the amendment, irrespective of whether it was for additional payment of taxes or for claiming a tax refund, must be made before the tax was assessed. Otherwise, the taxpayer must seek a correction via the tax appeal process to change such assessment."

Significantly, the court pointed out that even though a revenue official had advised Mr A to cancel his appeal and file two amended returns to resolve the problem, "such advice had no legal binding effect". Thus, raising this fact during the trial was not helpful, as the court needed to follow the correct interpretation of the relevant legislation.

Mr A might have won the case if he had amended his tax return immediately and opted to exclude such dividends before the tax assessment was issued. At any rate, the case is another bitter lesson that a taxpayer should thoroughly review his position before making any move in a tax dispute -- and should not easily trust tax officials' advice.

The government recently introduced a tax incentive programme to encourage individuals, including ordinary partnerships and groups of persons, to reorganise their businesses and operate them in the form of a company limited or a juristic partnership. This would make it easier to screen them for tax compliance, given the need to prepare statutory accounts.

The government of Prime Minister Prayut Chan-o-cha has passed a number of tax laws and regulations -- far more than its predecessors in the previous decade of political turmoil -- since coming to power in 2014. Keeping track of the enforcement of these new rules is complicated, as some have retroactive effect and some grant grace periods.

Ever since tax incentives for business reorganisation were introduced two decades ago, different issues have arisen intermittently, especially as they relate to an entire business transfer (EBT), which has become a popular practice.

Unlike a statutory merger, an EBT is not governed by the general rules of the Civil and Commercial Code or the Public Limited Company Act. Consequently, an EBT's merit relies solely on the provisions of the Revenue Code.

To support economic growth and increase the financial strength of local industries, the income tax burden that should have been borne by the transferor of a business is deferred and indirectly passed on to the transferee. It is not exempted, contrary to a common misunderstanding in the market.

While the law requires the assets to be evaluated at the market price, the transferor is not required to include gains arising from the transfer in its gross income. This applies as long as the transferee carries over the tax cost base of the acquired assets as it appeared on the transferor's books as if it were the transferee's own tax cost base, irrespective of the EBT price the transferee is actually paying.

For example, if the transfer price is 130 and the tax cost base is 100, the business transfer will normally result in taxable profits of 30. However, the transferor will not be required to include the 30 as a gain for tax purposes if the acquisition takes place under the terms of the EBT. In exchange, the transferee can only book 100 as its acquisition cost for tax purposes, e.g. depreciation over the residual useful life or calculation of profits upon resale, if any.

To ensure than an EBT is genuine, the Revenue Code mandates that the transferor be dissolved within the same accounting year that the business is transferred. To accommodate the tax audit process, a "Form Kor Or 1-4", together with the details of the parties and transactions, must be prepared and filed within 30 days.

Although an EBT may sound simpler than applying for Board of Investment promotion, a lack of clear understanding among tax auditors has led to a number of questions related to the substance of such transactions. For example:

Is it possible to register the transfer of certain assets, such as land and buildings, with other authorities, e.g. the Land Department, after the EBT date or after the accounting year when the transfer takes place? Is it essential to complete the transferor's liquidation within the same accounting year as the transfer? Is an EBT at fair market value allowed, or does the law strictly require the transfer to be done at book value?

While most tax authorities have tried their best to eliminate unnecessary debates that would otherwise hinder business integration, some auditors have raised questions that have made EBT transactions difficult in some parts of the country. The same question that was never considered an issue in one tax area office could become a major obstacle or even a deal-breaker in another. Among the questions that have arisen: Is it necessary for the transferee to issue new shares to the transferor as a consideration for the transfer, or is cash payment allowable? Must accounts receivable and payable be transferred in an EBT transaction? A recent precedent case reveals that there is always a devil in the details.

A notification of the Revenue Department director-general requires that Form Kor Or 1-4 be submitted within "30 days from the day the change is registered in the case of a business transfer". It is generally understood that this means 30 days from the day the transferor company's dissolution is registered with the Department of Business Development at the Commerce Ministry. Some taxpayers also believe that submission before the dissolution date would meet the criteria.

Let's look at the example of an EBT transaction by two transferor companies to one transferee three years ago. The Kor Or 1-4 forms for both were submitted "before" the transferor companies' dissolutions were registered. A revenue official accepted them without any objection, despite the absence of certification of dissolution from the Commerce Ministry. After the expiry of the 30-day deadline, a tax auditor decided that the early submissions failed to meet the criteria because they were made before the dissolution registration, and thus both transferors should pay income tax, VAT and stamp duties, together with the relevant penalties and surcharges.

The Revenue Department finally concluded earlier this year that a transferee was not allowed to submit Kor Or 1-4 forms before the dissolution registration date. Nonetheless, as the early submission in this case was caused by a genuine misunderstanding, the forms were deemed as submitted within the deadline, provided the transferee submitted the transferors' certification of dissolution within 15 days from the day it received the ruling.

It is disturbing to other taxpayers, who may not be as lucky as the parties in this case, to learn that such overzealous application of EBT laws could raise such a serious issue. This ruling also shows that a tax auditor can still mount an attack based on a minor formality, even though there is absolutely no hint of tax avoidance or any attempt to cause disadvantage to the government.

If you plan on doing a fancy EBT transaction, take into account the possible risk factors and be ready in advance in case things go wrong.

One of the original principles outlined in the OECD Model Tax Convention is that no taxpayer should be taxed repeatedly on the same amount of income earned from a cross-border transaction. This situation is referred to as "juridical double taxation" -- where income is subject to taxes under the jurisdictions of more than one state.

Tax incentives can be as sweet as honey, but making a mistake in compliance, inadvertently or otherwise, can leave a taste as bitter as gall. Corporate taxpayers have learned this painful lesson in light of court rulings on the tax treatment of losses carried forward from Board of Investment-promoted businesses.

On March 4 last year, Thailand and the United States entered into an agreement to improve international tax compliance and to implement the Foreign Account Tax Compliance Act (Fatca), which Washington introduced in 2010 in an attempt to discourage tax evasion by US citizens holding assets abroad.

The current government has been trying very hard to make Thailand a jurisdiction that places more emphasis on substance and less on surface appearances. This is evident in recent legal reforms, but the attitudes of state authorities remain problematic. Many seem to believe that in order to be patriotic, the private sector must submit to any extra conditions that authorities impose above and beyond the legal framework.

Most people are aware that there are two major types of double taxation for income tax purposes. The first is juridical double taxation, in which one taxpayer is taxed twice on the same amount of income by two different jurisdictions. This is normally dealt with in the context of double-taxation agreements.

What would you do if one day a government body issued a ruling that set aside a guideline you were required to comply with, and another day it issued another ruling requiring you to do a different thing, potentially exposing you to wrongdoing? Unfortunately, that day appears to have arrived in the case of the Board of Taxation, a panel drawn from various respected government agencies, appointed and empowered under the Revenue Code to provide interpretations on tax matters.

Two hundred and forty years ago, the renowned economist Adam Smith set out four canons of taxation in The Wealth of Nations. A decent tax system, he wrote, should follow the standards of justice, certainty, convenience and economy.

The world is entering a new era in which national tax authorities are joining hands to set up a system to hound those who dodge paying their fair share of tax by applying unacceptable tax-planning schemes.

This year has started with some legislation aimed at improving tax treatment and allowances to enhance the well-being of people in general, and to add to Thailand's charm as a target for business investors.

The seriousness of economic inequality was portrayed dramatically by Oxfam International last week, when it reported that the eight richest people in the world own as much wealth as the 3.6 billion who make up the poorest half of humanity. In Thailand, the wealth held by the 50 richest people has been estimated at 25% of the country's gross domestic product.

Every provision in every piece of legislation has its own reason for being, and any act that contradicts the spirit of the law, even if carried out by a government body, is generally disallowed if it deprives a person of his or her rights. This principle is also applied in considering the time limit for a taxpayer to claim a tax refund.

In general, Section 27 ter of the Revenue Code entitles the taxpayer to request a refund of taxes paid, or withholding tax that is withheld in excess of the required amount or without any tax liability, on condition that the refund application must be lodged within a period of "three years from the due date of the filing of the tax return".

In reality, a situation requiring a taxpayer to claim a refund could arise after the statutory deadline. This phenomenon raises a critical issue as to whether the normal three-year rule should still apply. Is the taxpayer being forced by law to give up the right to a refund?

A recent court case illustrates how this could play out. It involved an auction of land held by the Legal Execution Department, in which the winning bidder paid withholding tax on the purchase price when the ownership transfer was registered in 2004. The court later revoked the auction results, and a letter was issued in 2008 to the Land Department with an instruction to void the registration of the land transfer. Thus, the status of the parties to the transaction reverted and it was as if no transaction had ever taken place. As a result, the bidder had no liability to pay withholding tax either.

The Legal Execution Department refunded the purchase price of the land to the bidder, but not the withholding tax, and the bidder decided to seek a tax refund from the Revenue Department in 2009. Predictably, the department refused to make the refund, asserting that the three-year deadline from the due date of the withholding tax filing in 2004 must apply.

However, the Supreme Court ruled in favour of the bidder, saying that "the three-year deadline under Section 27 ter did not apply to this case, as it was not a claim for a refund of excessive withholding tax, or a refund of tax being withheld without a liability to do so, as of the time the tax was withheld". Accordingly, it ordered the department to refund the withholding tax paid in 2004.

This decision is in line with the fundamental rule of the Civil and Commercial Code (CCC), which requires the statute of limitations to begin "from the moment when the claim can be enforced". This means the moment when the taxpayer's right to claim a tax refund occurs, in this case the auction revocation order in 2008.

That seems to be a happy ending for the bidder, but a question remains as to what the time frame for the tax refund should be in this case.

In the absence of a time frame stipulated by the court for submitting the tax refund form, as the situation is not covered by any specific provision in the Revenue Code, the only guideline appears to be the general 10-year rule of the CCC.

In a similar case, the Department of Highways withheld tax from the price it paid to the Crown Property Bureau (CPB) for some land in 1993. Since the Bureau was not subject to corporate income tax liability, it requested a refund of withholding tax from the Revenue Department without submitting a proper tax refund form (Kor 10).

It was not until 2010, after the Revenue Department issued a letter confirming that the Bureau had no liability to pay tax, that the latter submitted Form Kor 10. The department refused to make a refund on the grounds that the form had been submitted after the expiry of the three-year rule under Section 27 ter.

The court recently ruled that, "since the CPB was not a taxable unit under the Revenue Code, and it had no liability to file tax return, Section 27 ter did not apply as the three-year deadline from the due date of the filing of tax return could never start". Thus, the court applied the general 10-year rule of the CCC instead.

You may be facing the situation of a tax refund claim for which the three-year deadline in the Revenue Code has already passed. But it could still fall under the 10-year rule of the CCC before you have to give up your right to claim. You should take a close look at where you stand, and not simply surrender your rights because someone in your local Revenue Department office says you have no case.

More than two centuries ago, Adam Smith set out the rule that equity, certainty, convenience and economy are the top four canons for a good tax system. But since government authorities tend to care less about these principles and more about collecting taxes, it's no surprise that confusion persists when it comes to realisation of expenses.

Basically, in computing net profits for tax purposes, an expense should be realised and deducted if it is relevant to the income that was earned during the same accounting year. However, this matching principle may not always apply to tax deductibility, as the occurrence of expenses and income must be ascertainable rather than probable.

As the Supreme Court explained in one of its decisions: "[T]he rule of thumb in realising income or expense under the accrual basis methodology is that the right to receive such income, or the liability to pay such expense, including their amounts, must be ascertainable.

The case in question dealt with a company paying its board of directors for work performed in 1992, but the payment required approval from the shareholders' meeting that took place in 1993. The court ruled that "since the certainty regarding the definite right of the board to receive consideration, as well as the amount, was not ascertained until the approval was given at the shareholders' meeting in 1993, the consideration must be realised and deducted for tax computation in that year.

Mind you, this does not necessarily mean that such expenses must always be realised and deducted immediately after shareholders approve them. If the company or the shareholders' meeting impose certain conditions on the payment, those terms also must be fulfilled so that the expense can be ascertained.

In a recent revenue ruling, a company paid bonuses totalling 42 million and 38 million baht to eligible employees for work done in 2007 and 2008, respectively. The bonuses were subject to approval by the board of directors, and the employees had to continue to work with the company until March of the following year in order to receive the money.

The Revenue Department declared: "[I]f the bonuses could only be paid after they were approved by the board, and the eligible employees continued to work at the company until March of the following year, then such bonuses must become tax-deductible as expenses only when all such conditions were fulfilled.

More complex issues arise with regard to damages that result in a company taking criminal action against an offender. Since it is uncertain whether the damages will be recoverable, it is not clear when they should be realised as expenses, especially since legal procedures can take years. Even the Revenue Department has offered differing views.

In one case, a sales manager embezzled money from his company in 2003. In 2004, the company filed a criminal case, the manager confessed and agreed to compensate the company in instalments over three years. The Revenue Department said the company was entitled to deduct the damages as expenses "when the damages took place". That was not 2003, but 2004 when the manager confessed his crime. The company was also required to book the compensation paid by the sales manager as income in the year of receipt.

However, the story was different in a subsequent case involving a sales manager who swindled his company out of 710 million baht. The company reported the case to the police and filed a criminal complaint against the manager. In this case the Revenue Department said that "when the damages took place" was the accounting year in which the swindle took place, not the accounting year in which the legal procedure was completed. This now appears to be the department's default position.

A recent revenue ruling reinforced this view and offered some welcome leeway to the taxpayer. The case involved an employee who sold fuel to customers at unusually low prices between 2003 and 2007. The company and the public prosecutor took criminal action in 2008 for embezzlement. The employee was eventually found guilty and imprisoned under a Supreme Court judgement issued on Dec 25, 2014 but pronounced on June 22, 2015.

The Revenue Department reiterated that "when the damages took place" meant the accounting years in which the employee committed the embezzlement. However, if the company could not book the expenses in those accounting years, it could realise the damages in the accounting year of the court judgement, which was 2014.

This decision reflects good faith on the department's part, and could save the company from some potential losses. After all these years, if it was required to deduct damages incurred from 2003 to 2007, it would need to file an amended tax return and seek a refund, which may be limited due to the expiration of the three-year period for a refund application.

That said, the decision unintentionally raises one critical issue. Keep in mind that the damages were to be realised when the Supreme Court made its judgement in 2014, but not when the judgement was pronounced on June 22, 2015. It was impossible for the company to know the outcome of the Supreme Court judgement in 2014. This would ultimately lead it to amend its tax return for 2014 and to apply for a refund when it learned of the judgement on June 22, 2015.

In short, it seems that determining the certainty of the tax expenses is a story of never-ending complexity.

By Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at admin@lawalliance.co.th

Trading shares is a common activity today because various authorities -- including the Revenue Department, the Stock Exchange of Thailand and the Securities and Exchange Commission -- have established clear guidelines for almost every aspect of the process. This helps put investors' minds at ease, as they feel they have enough knowledge to deal with most of the tax issues without difficulty. Unfortunately, this belief can be shaken when the guidelines do not strictly follow the fundamental provisions of the law.

It is amazing how ubiquitous software has become in the past few decades, becoming an essential part of everything from washing machines to mobile phones. Few people are aware, however, that there can be tax implications for some software that comes with the hardware they are paying for.

Software frequently forms an inseparable component built into an electronic product. Given the Revenue Department's tendency to treat payment for the use of software as a royalty, should a value be assigned to the use of embedded software and classified as a royalty for tax purposes? When a royalty is paid in or from Thailand to an overseas entity, the tax is usually higher than what is imposed on the sale of the goods, even if the overseas entity claims protection under a double-taxation treaty.

withholding tax at the source (before reduction under any applicable tax treaty) as well as 7% value-added tax (VAT), unless the consumption will take place outside Thailand. Since enforcing tax collection from the foreign entity is difficult, the customer in Thailand is required to file and pay the tax at the source (Form PND 54) and VAT (Form PP 36). This must be done within seven days from the end of the month in which the royalty is paid. Failure to comply will result in surcharges of 1.5% per month for taxes in arrears.

Whenever software usage is granted on a stand-alone basis, the Revenue Department tends to rely on provisions in the Copyright Act BE 2537 (1994) that treat software as a kind of literary work. As a result, consideration for such use is treated as a royalty even if the software has the characteristics of an off-the-shelf product, such as Microsoft Office or antivirus software that anyone can purchase.

The latter position is not in line with internationally accepted commentaries to the OECD Model Tax Convention on Income and on Capital, which hold that payment essentially made for a customer's own use of such off-the-shelf programs is classified as "business profits".

Given the extreme position of Thai authorities, if you purchase finished goods in which software forms an integral part, how should you treat such built-in software for tax purposes? Would your position be weakened if the seller forces you to agree to a royalty-free licence when you activate the software?

It seems that the Supreme Court agrees with the taxpayer, if a built-in program has the characteristics of "operating software" essential for the functioning of the purchased product. The ruling stemmed from a case involving a company that imported a private automatic branch exchange (PABX) telephone switching system. The import entry declaration listed specifications and prices of the software (contained on a floppy disk) separately from other parts of the PABX.

The court said: "Since the software formed the operating software that was necessary in operating the PABX, and could be used with the purchased PABX only, it was treated as an integral part of the PABX system. Further, the facts appeared that there was no purchase of the software separately from the PABX that would otherwise be treated as a stand-alone licensing agreement. The transaction formed the purchase of goods composed of the operating software necessary for such particular goods, and was not separable. This case could not be construed that there was a separation of the prices for the operating software from the PABX; thus no royalty fee for the copyright had been paid.

As a result, the court concluded that the company was not liable to pay withholding tax or VAT.

Based on this precedent, whether the value of software should be treated as a taxable royalty depends on the nature of the software. Nonetheless, not all software bundled with purchased goods is always treated as part of the finished product. If the software in the package is not "operating software", such as iOS in an iPhone, but is "application software", such as Photoshop, the payment attributable to such software will be treated as a royalty. In fact, the Revenue Department has advised consistently for more than 15 years that fees paid for application software are always royalties for tax purposes.

Second, while the company in the Supreme Court case specified the price breakdown for the operating software and the floppy disk in its import entry, it seems no actual licensing agreement was concluded with the PABX supplier. This tends to run counter to real-life situations in which purchasers are often asked to agree with the terms of a royalty-free licence agreement, either on paper or online, which is considered necessary to protect the right of the licensor.

Meanwhile, the Revenue Department often considers operating software as part of a product where there is no price breakdown. Thus, how the relevant agreements and customs entries are arranged is another important factor the purchaser needs to consider in order to reduce tax risk.

It is undeniable that real property has taken the biggest hit from the tax policies of the current military government. The new gift and inheritance taxes focus on real property, while the new property tax is designed to correct the flaws of the House and Land Tax Act and to collect more revenue from properties used for commercial purposes as well as unused properties. The latter tax is expected to generate huge sums for the government.

With the new land and building tax due to take effect from next year, in combination with the inheritance tax and changes to the Revenue Code on gifts from parents to children earlier this year, more people are attempting to manage their properties to save tax. Though it is everyone's lawful right to do tax planning, it is necessary to be aware of some relevant interpretations.

One common suggestion from various experts is for parents to transfer property with a value not exceeding 20 million baht per year to their legitimate children, who will then use that property as their main residence.

In general, the individual giving away the property will be deemed as an income earner under the Revenue Code, and must pay tax based on the appraised value as announced by the Land Department. Where the transferor is a parent (unless the transfer is to an adopted child), the parent will be exempted from tax on the deemed income. A child who receives property will also be exempted from the new land and building tax on the first 50 million baht of the main residential property's value.

However, many people appear to be overlooking the question of whether such transferred property is land originally acquired or used for commercial purposes. A parent may need to think twice about this, especially in respect of specific business tax (SBT) of 3.3%, which applies to the "sale of immovable property in a commercial or profit-seeking manner".

A recent Supreme Court case involved an individual who had developed a big plot of land by dividing the title deed into small plots and constructing roads and infrastructure prior to offering plots for sale. He then transferred 49 plots that remained unsold to his child for free without paying SBT, on the grounds that these plots were not transferred for commercial purposes.

The court ruled that, "since the entire plot of land had already been developed, the transfer of the small plots after such development to the child must also be treated as the 'sale of immovable property in a commercial or profit-seeking manner', thus subject to SBT -- without any necessity to consider whether the transaction was qualified for the SBT exemption."

The above suggests that, once a plot is developed by the parent for trade, any transfer from the parent to a child -- even if it is unsold land not fit for commercial use -- will continue to be treated as a "sale" and not exempted from SBT.

Another important question could arise under the new tax regime. Will the parent still be entitled to the exemption from personal income tax on deemed income equal to 20 million baht of the land value once he is required to pay SBT as per the court judgement? Also, if the parent in the above case chooses to transfer to his child a different plot in a different location that has no relationship to the commercial plot, would he still be subject to SBT? For instance, an individual develops land in Chiang Mai for sale but transfers a residential plot in Phuket as a gift to his child instead. All these questions need to be taken into account before a transfer.

What tax liability will children face when they sell a plot of land received from a parent? While the law exempts personal income tax for the sale of "movable property obtained via an inheritance or obtained without a commercial or profit-seeking purpose", the sale of immovable property obtained via an inheritance or a gift will only be eligible for the standard deduction at half of income and taxed separately from other income.

To avoid the subsequent tax burden upon resale, many families have been advised to convert such plots of land into movable property, such as shares in a family holding company, so that the subsequent sale of shares by children would be eligible for a personal income tax exemption.

Not so, says the Revenue Department. Its view is backed by a Supreme Court ruling in a case involving some heirs who incorporated a company to which they contributed inherited immovable properties. Later, some heirs sold the shares for profit and claimed a personal income tax exemption as for movable property. The court explained:

Since the company had the purpose of seeking profits to be distributed to shareholders, gains from the sale of shares in the company were subject to income tax. The establishment of the company was to manage the business so that the value of the inherited immovable properties would increase, which constituted commercial and profit-seeking purposes".

Only in a case where inherited properties are shares from the beginning, the Revenue Department advises, would the heirs be entitled to the tax exemption on gains from a sale. Thus, it is important to think through various scenarios involving how properties should be managed in order to optimise the family's financial position.

This article was prepared by Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at admin@lawalliance.co.th

Businesses seeking to structure cross-border transactions in ways that help them avoid paying tax are finding it more difficult as authorities worldwide step up information sharing. One such example is the Global Forum on Transparency and Exchange of Information for Tax Purposes, which is driven by the Organization for Economic Co-operation and Development and has 135 members. The cabinet recently approved Thailand's membership in the forum.

Most tax matters are all about sorting taxable income items from non-taxable ones. Whenever you receive a payment that is referred to in a contractual document as "reimbursement", it is important to realise that there is only a thin line between a genuine reimbursement and one that is regarded as disguised revenue for tax purposes.

The referendum on the draft constitution has been staged successfully and the people have spoken. In the same spirit, perhaps it's time that the Revenue Department listened to the voices of troubled taxpayers and corrected some of its mistakes promptly and transparently.

While stamp duty is a type of nuisance tax that tends to be forgotten, failing to comply with its requirements could have distressing consequences. An instrument that is not properly affixed with stamp duty may be subject to surcharges that could climb as high as 600% of the original duty. As well, it could be prohibited from being used as evidence in a court of law.

Missing Inventory and VAT Refunds: finding the evidence

In a tax audit, nothing should be asserted by the taxpayer without the ability to verify its accuracy. Such verification is often crucial to a taxpayer's success in withstanding the taxman's challenge.

Another aspect of BoI Tax Losses

Many people have expressed serious concerns about the implications of a recent Supreme Court judgement against NMB-Minebea Thai Ltd in a landmark tax dispute dating back eight years. The outcome draws attention to the confusion surrounding the treatment of tax losses from businesses that enjoy Board of Investment promotion.

It has long been understood that a taxpayer has the right to a contractual arrangement that will allow him or her to incur the lowest tax cost where possible. Nothing in past constitutions or the new draft requires Thai nationals to choose a transaction that would expose the parties to the heaviest tax burden, as long as the transaction is within the law.

Published: 19 Apr 2016 at 04:00 / Newspaper section:

How does the Panama leak affect you?

If not for the Songkran festival, the news that 16 Thai names were on the infamous Panama Papers list might have got more attention. However, more worrisome is the Offshore Leaks Database, first released by the International Consortium of Investigative Journalists in 2013. It exposes the names of more than 750 Thailand-based people and entities, Thai and foreign, that are or have been connected with offshore tax-planning structures, mostly in the British Virgin Islands and Panama.

It is only the first quarter of this year but we have already seen some new tax laws and regulations as a result of the military government's endeavour to streamline enforcement and improve compliance rates.

All business enterprises from time to time may encounter a situation in which they make payments to a recipient, but its identity cannot be proved to the satisfaction of tax authorities. We are not talking about a payment made in a sham transaction simply to receive a tax deduction but a payment that completely fulfils the cardinal rules such as those made on an arm's-length basis and exclusively spent for business purposes.

Bonuses as a Prohibited Deductible Expenditure

To an employee who performs work with passion and pride, the year-end bonus (or special remuneration in whatever form) not only means extra wealth but also signifies how his or her work has been valued.

Many small businesses had something extra to celebrate at the New Year with the surprise announcement of a tax amnesty scheme. â€śAmnestyâ€ť is a word the director-general of the Revenue Department refused to use in a recent interview, stressing anyone breaching the conditions could face an investigation later. Given the broad scope of the law, all small and medium-sized enterprises (SMEs) must understand what is involved.

Scope of the law: The legislation applies to a company with revenue that does not exceed 500 million baht during the 12-month accounting year ended on or before Dec 31, 2015. This is measured purely from a tax perspective regardless of the revenue declared in the profit and loss statement.

Wherever amnesty is applied, Revenue Department assessors will not be allowed to audit, assess, require tax payment including surcharges and penalties or impose punishment in respect of (i) corporate income tax for any accounting year that started prior to Jan 1, 2016, (ii) value-added tax (VAT) and specific business tax (SBT) for any month prior to January 2016, and (iii) stamp duty on documents executed before Jan 1, 2016. It does not, however, apply in the following situations:

a) Taxes already under audit with summonses issued before the end of 2015. As it turns out, the department issued a number of summonses during the last 10 days of 2015 on medium-sized enterprises, presumably to exclude them from the amnesty and preserve its revenue base.

b) VAT and SBT for any tax month in which an assessor conducted an investigation by raiding the premises before the end of 2015.

c) Companies that issue or use fake tax invoices or evade tax by claiming false deductions.

d) Companies against which legal action has already been taken by an official, public prosecutor or the court.

e) Companies that have claimed or will claim tax refunds for the exempted year â€” for example, a company applying for amnesty but subsequently claiming a refund for 2015 will lose its immunity from being audited.

While the amnesty will not be granted on tax caught under a) above, it could still be sought for other taxes â€” for instance, if a company received a summons for a VAT audit for any month in 2015 and is granted a tax amnesty, assessors will not be allowed to audit VAT for tax months before January 2015 or any other taxes falling outside the summons such as corporate income tax before Jan 1, 2016. The same could be said regarding VAT and SBT assessed by a raid in b), taxes subject to ongoing dispute in d) and taxes for which a refund is requested in e).

It is also important to note that any company that evaded tax in 2015 by underdeclaring revenue will not be excluded from amnesty by reason of c).

Conditions for maintaining amnesty status: In order to obtain and maintain tax amnesty status, the SME must do the following:

a) Apply for amnesty between Jan 15 and March 15, 2016 via the internet.

b) File corporate income tax (CIT) returns together with payment (if any) within the deadline for filing on or after Jan 1, 2016.

c) File VAT and/or SBT returns together with tax payment (if any) within the deadline for filing on or after Jan 1, 2016.

d) Pay stamp duties from Jan 1, 2016 onwards.

e) Prepare statements of financial position and accounts to reflect the true business situation for accounting years from Jan 1, 2016 onwards.

f) Take no action to avoid tax from Jan 1, 2016 onwards.

If any condition is breached, the business can lose amnesty status, and officials will be allowed to audit and assess taxes as if the exemption were never granted.

Important clarifications: Some other issues could arise regarding the conditions and could result in loss of amnesty status:

Regarding filing and payment in b) and c), if the full tax amount is not paid due to a miscalculation, will it be treated as non-compliance with amnesty conditions? Will the requirement in b) apply where there is a missing half-year CIT payment, based on a more than 25% underestimation of full-year net profits?

In d), an issue may arise where the Revenue Department and the company hold different views regarding stamp duty liability.

Whether an action represents tax avoidance in f) could be disputed, as the term in Thai does not differentiate between avoidance and evasion and can be interpreted to include both.

Most importantly, it is unclear how long a business must keep all the above conditions intact â€” for example, if an SME happens to breach one condition in 2018, will it forfeit its immunity from an audit of 2015 taxes?

Without further clarifications from the department, it may be difficult for any company to fulfil all the conditions listed above for as long as the statutory limitation period lasts.

Further risks for small enterprises: Where a small company entering the amnesty also qualifies for a CIT exemption or reduction â€” full exemption for 2016, exemption for the first 300,000 baht in net profits for 2017 and a 10% CIT rate thereafter â€” and its amnesty status and CIT privileges are subsequently cancelled, additional surcharges on unpaid CIT will also apply.

Therefore, any SME interested in both the tax amnesty and the CIT privileges must be very careful not to breach the amnesty conditions.

This article was prepared by Rachanee Prasongprasit and Prof Piphob Veraphong. They can be reached at admin@lawalliance.co.th

Many of you may be busy this week spending 15,000 baht to qualify for the government's "gift" of tax savings before Dec 31. Overlooked in the holiday rush by all but a few businesses may be another important gift from the government -- a tax treaty between Thailand and Ireland.

Ever since Thailand and Singapore signed a new double-taxation treaty on June 11, numerous publications have provided outlines of what has changed from the original treaty that has been in effect for 40 years.

The new treaty has not yet been ratified, but given Singapore's importance as a trade partner and the imminent formation of the Asean Economic Community, it is important to understand the potential tax impact once it takes effect.

First, more Singaporean entities will be able to carry on sales and services in Thailand for a longer period. The Thai Revenue Code basically requires a foreign entity that is "doing business in Thailand" to pay corporate income tax on net profit derived from the Thai source. If the foreign entity qualifies as a resident of a country that has a tax treaty with Thailand, the term "permanent establishment" (PE) replaces "doing business in Thailand" but with a much narrower scope.

Most tax treaties including the original Thai-Singaporean one allow a foreign company to perform services in Thailand for no more than six months (even less in some cases), but the new one provides a longer time test. When a Singaporean entity performs construction, installation or assembly services including related supervisory activities, it will be deemed as having a PE in Thailand if any project lasts more than 12 months. This is the longest PE threshold Thailand has ever agreed to.

Such an absurdly long period will benefit a Thai entity doing business in Singapore as well, but how many Thai companies can enjoy this provision? What caused Thai negotiators to surrender to the Singaporean government?

For other types of services including consultancy in general, PE will apply if the activities in Thailand continue for an aggregate of more than 183 days within any 12 months. Although the original treaty with Singapore is silent on this matter, this new threshold is on a par with the norm the Revenue Department has adopted.

Further, the new treaty no longer includes as a PE the "habitual securing of orders" by a local agent -- that is, a party in Thailand procuring purchase orders from local customers on behalf of a Singaporean supplier. This runs counter to the traditional Thai practice of treating such activity as a PE for tax purposes and will give an edge to suppliers from Singapore in soliciting Thai customers through local agents without falling foul of the Thai tax regime.

Changes in withholding tax treatment: While the withholding tax rate on dividends distributed to Singaporean shareholders remains unchanged, the new treaty will adopt the following tax rates:

Interest: While the reduced tax rate of 10% still applies on interest paid to a financial institution and an insurance company, the new treaty will extend the benefit to interest charged for the sale on credit of equipment, merchandise or services. The reduced rate will not apply if the parties are not dealing on an arm's-length basis.

Royalties: The withholding tax rate will be reduced from 15% to (i) 5% for royalties paid for the use of copyright, artistic or scientific work including cinematographic films; (ii) 8% for royalties paid for the use of a patent, trademark, design or model, plan, know-how and the right to use industrial, commercial or scientific equipment; and (iii) 10% for any other royalties.

The original treaty does not classify the "right to use industrial, commercial or scientific equipment" as a royalty (thus, there is no withholding tax on rent paid to a Singaporean lessor), which is in line with the OECD's Model Tax Convention on Incomes and on Capital. However, the new treaty imposes 8% withholding tax on such rent. This is one of few trade-offs benefiting Thailand.

Capital gains: While capital gains from the disposal of shares are completely exempted from tax under the original treaty, the new one will allow the Thai government to collect withholding tax on gains if the shares are not traded on the SET and at least 75% of the asset value in the share issuing company is directly or indirectly derived from immovable properties.

Potential double-dip situations: The current treaty has a Limitation of Relief mechanism to prevent "tax treaty shopping". Singapore's Income Tax Act exempts revenue derived from foreign sources if it is not remitted to the city state. For such revenue to be eligible for treaty privileges, it must be remitted to Singapore for Singaporean tax purposes. This is meant to prevent a double-dip situation whereby no tax is imposed in either Thailand or Singapore.

The new treaty repeals the Limitation of Relief provision, which was created to prevent abusive transactions that exploit tax treaty benefits. This means anyone could set up a Singaporean company to earn revenue from Thailand and avoid taxes in both countries. That is quite a shock from a tax treaty policy standpoint.

This article was prepared by Rachanee Prasongprasit and Prof Piphob Veraphong. They can be reached atadmin@lawalliance.co.th

Looking back at tax developments over the past year, we've seen some promising incentives granted by the government and other developments that have caused taxpayer anxiety.

One contentious issue involved transfer pricing, which we discussed in a previous column ("Transfer Pricing Loopholes Likely to be Closed Soon", June 2). The cabinet at midyear approved an amendment to the Revenue Code to incorporate a new transfer pricing rule, which is somewhat similar to Section 482 of the US Internal Revenue Code. It applies when the price in a transaction between two related parties is not quoted on an arm's-length basis. In other words, it is not the same as the price they would have agreed had they not been related.

In our previous article, we took a big-picture look at the forthcoming changes in tax appeal procedures at the court level. One of the main changes is an appeal against a judgement by the Central Tax Court must be made to the new Special Court of Appeal, and its judgement will be treated as final. Only in some exceptional cases will the litigant be able to appeal to the Supreme Court, which must grant permission for the filing first.

It is commonly known that tax disputes can take years to resolve, with the longest delays usually seen at the Supreme Court level. From the date a complaint is submitted to the Tax Court until the final judgement is rendered by the Supreme Court, it could take four to seven years.

Land and Building Tax Bill Requires Greater Clarity

Life is getting interesting for taxpayers, with not only an inheritance tax and a new gift tax regime on the way but also a new property tax. The finance minister recently said the land and building tax bill would go before the cabinet very soon and take effect within the next two years. It could be more bad news for some residential property owners.

Ever since Section 65 bis and Section 65 ter of the Revenue Code were created, most transactions, unless excluded from the tax regime, have been subject to tax based on transaction value. However, the law rarely accepts a transaction value lower than the "market value" and allows authorities to assess additional tax based on "imputed revenue", which is on a par with the market value.

Because transport forms a part of many business activities, much confusion can arise when calculating tax for a transaction that includes transport along with the sale of goods or provision of services.

Treatment of Investment in Accounts Receivable Challenged

The year 1997 was one of the most important in the economic history of Thailand. Not only did the world taste the Tom Yum Kung crisis, but some people in Thailand discovered a new line of business that brought some of them great wealth. We're taking about investing in distressed assets.

Fairer Tax Treatment on the Cards for Upfront Rents

Because it tends to increase continuously in value, real property has always been one of the most desirable investments. While some people have been fortunate enough to acquire properties in upscale areas, many others are competing to find sites speculated to be the next hot spot.

The long-awaited formation of the Asean Economic Community (AEC) is just over five months away. Drawn by the promise of a freer flow of goods, services, investment, capital and skilled labour, many businesses are looking to expand into neighbouring countries. Of course, doing so will entail new taxes in other countries and businesses need to study how to prevent or reduce the effects of double taxation.

A change to the Revenue Code last year repealed the exemption of personal income tax (PIT) on profits distributed from a non-registered partnership and a body of persons. It put an end to one of the most abusive tax-planning schemes used by the wealthy. However, it has also created onerous tax liabilities for individuals who have no choice but to run a business via such vehicles.

Realisation Rules for Zero-Coupon Notes

Each business activity has its own timing for its own reasons, and the realisation of revenue and expenses for tax purposes is no exception. Under the Revenue Code, the "accrual basis" methodology always applies to the realisation of revenue and expenses for tax calculation unless a different basis is approved by the director-general. The accrual basis requires that:

Unusually Rich? Then be Prepared for a 'Special' Audit

It's not a story that has attracted much attention, but the Revenue Department is being urged to start taking tax evasion by corrupt politicians much more seriously. The goal is to not only improve below-target tax collections but also prevent such politicians from using their ill-gotten gains to finance their next election campaigns.

The introduction of a new tax regime for unregistered partnerships this year has created a lot of anxiety for a lot of people. New legislation repealed an old rule that made it too easy for individuals to create separate taxable entities to reduce personal income tax liability.

It's not a story that has attracted much attention, but the Revenue Department is being urged to start taking tax evasion by corrupt politicians much more seriously. The goal is to not only improve below-target tax collections but also prevent such politicians from using their ill-gotten gains to finance their next election campaigns.

Over the last couple of years, tax practitioners have become increasingly aware of suspicious or shady transactions, especially those without a genuine intention, being challenged more frequently by the Revenue Department

He regional operating headquarters (ROH) provisions that Thai tax authorities introduced in 2002 have never been popular, as they are difficult to understand and comply with. As a result, many businesses have bypassed Thailand and chosen Kuala Lumpur for their regional offices.

Over the last couple of years, tax practitioners have become increasingly aware of suspicious or shady transactions, especially those without a genuine intention, being challenged more frequently by the Revenue Department.

Over the last couple of years, tax practitioners have become increasingly aware of suspicious or shady transactions, especially those without a genuine intention, being challenged more frequently by the Revenue Department.

With the economy in decline and many organisations revising their forecasts for Thailand, imposing tax may already seem like a punishment. On top of the ordeal of paying tax, one should be aware that non-compliance could lead to even more expensive punishments.

Choosing the Right Price

It is not always possible for everyone to please the taxman by charging what is considered to be the highest and best price upon entering into a transaction. Pricing strategies can be affected by various commercial factors, such as the benefits a business can derive from selling goods at a lower price to a reputable customer for marketing purposes or bargaining power.

Court Ruling on Guarantee Fees should bring more Fairness

Given the unsettled political situation, the country risk for Thailand is certainly on the rise. In line with basic business principles of diversification to spread risk, the private sector starts looking for opportunities to move business offshore and set up overseas subsidies. With the formation of the Asean Economic Community less than two years away, such strategies make good sense.

Taxing Group Term Life Policies

If you plan to buy a life insurance policy on your own, it's not much of a problem from the tax aspect. Of course, you need to think a bit if the premium you are paying actually qualifies for the tax deduction up to 100,000 baht per year. The real concern in this case is that you are using your after-tax money to buy it, which is not very effective tax planning.

Smartphones and tablets make your life easier, and there are many applications and content services that can be purchased and downloaded online.

Of course, it is unavoidable that payments must be made by credit card or e-banking transaction. Believe it or not, Thailand has nearly 15 million smartphones and tablets, and the combined market value of mobile apps and content services in 2013 is estimated at 15 billion baht, up 10-15% from last year.

No doubt, then, it is a good time for the taxman to think about his fair share.

Is anyone trying to convince you to join the anti-government protest by pursuing "civil disobedience" in not paying taxes? Regardless of whether the Yingluck Shinawatra government is your favourite or your lifelong hatred, no one can deny that the duty to pay tax is one of your commitments to this nation. If you decide not to do so, don't expect any amnesty law to release you from penalties and surcharges.

As the current government's status now appears in limbo, it is not certain whether it will be able to finish issuing the royal decree reducing personal income tax rates as promised to all of us. In the worst-case scenario in which the process is disrupted, the draft legislation could be dragged on until after a new election, if any, is completed.

Earlier this year, the Revenue Department issued notifications that require extra information to be specified in tax invoices and debit or credit notes. On the surface, these notifications may not appear very exciting compared with those relevant to mergers and acquisitions, real estate investment trusts or some capital market transactions. But they could cause headaches for businesses that are not aware of the implications.

Whenever the Revenue Department asks a taxpayer for an additional tax payment through an assessment notice, or a taxpayer's request for tax refund is turned down, there is always confusion about the process the taxpayer should follow in order to ensure that the right to appeal to the court is preserved.

Tax Reporting of OTC Share Transactions

The government is currently struggling with an important decision as to whether it should increase the value-added tax (VAT) rate to cope with the need to cover the rising budget deficit. As the increase will certainly have a negative impact on living costs, raise inflation and reduce domestic consumption, some government officials favour expanding the tax base as much as possible in lieu of increasing the VAT rate.

It was quite a shock to learn last week that Thai children's education is ranked eighth in Asean, behind Vietnam and Cambodia, by the Programme for International Student Assessment (Pisa). What does that have to do with our value-added tax (VAT) system? Allow us to explain.

Group of Persons or Ordinary Partnership?

Tax fraud has been haunting a number of high-ranking officials under the supervision of the Finance Ministry. Lots of questions remain unanswered as to why huge refunds were so easily approved for dummy exporters, while small refunds usually take so much time and requires lots of paperwork, which seemingly is never enough to satisfy tax auditors.

Setting up an unregistered partnership to enter into a transaction such as providing services or leasing land plots has been a common technique for a long time. This year, things are going to change and require a closer look from the tax management perspective, especially when September is approaching and the half-year tax return needs to be prepared.

A news report last week about VAT fraud of 3.6 billion baht by more than 30 companies claiming exports of empty containers reminds everyone of the 1997 incident that misled the government to believe that Thailand's economy was still doing well due to healthy exports.

With great efforts from a working team, the Securities and Exchange Commission seems ready for the launch of real estate investment trusts (REITs). Several property projects are in the pipeline pending. The arrival of REITs also triggers a countdown for regular property funds (PFs), which have been in use for a long time.

In the real world, your company may come across a situation in which a financial statement cannot be signed off because of some problems. For example, conflict from changing the licensed auditor from one house to another often delays the audit process as the old one may refuse to cooperate and return necessary documents. Violating Securities and Exchange Commission rules, such as for a connected transaction, could also be the cause of postponing the completion of the financial statement until the problem can be resolved.

Taxpayers and the Revenue Department have been locked in endless disputes over the nature of fees paid to offshore service providers. Should such fees be classified as "royalties" or "service fees" under an agreement for avoidance of double taxation, more commonly known as a tax treaty?

The status of all private schools in Thailand has changed since the Private School Act B.E. 2550 (PSA 2550) was passed in 2007 and became effective from Jan 9, 2008, but confusion and ambiguity remain on many fronts.

Effective from Jan 1, 2013 onwards, Thailand has a new alternative investment vehicle, the Real Estate Investment Trust (REIT), which provides greater flexibility in managing real estate assets. Interestingly, the REIT can not only invest in Thailand but also in real assets situated abroad. As the baht gains against major currencies, the REIT seems to have come at the right time, just as foreign investors have been shifting funds here.

Toward the end of the year, there is always a rush by middle to upper-income earners to invest in Retirement Mutual Funds (RMF) and Long Term Equity Funds (LTF) to obtain the greatest tax savings possible for the current year and, at the same time, to maintain the previous year's tax exemption privilege.

The 300-baht daily minimum wage has been the talk of the town and its impact has already affected the operations of many businesses since it took effect in April in Bangkok and six other developed provinces. On Jan 1 the wage will rise to 300 baht in the remaining 70 provinces of the country, with further challenges expected for many employers.

Tax treatment of fringe benefits from employment always plays a key role for both employer and employee. It also can be the source of endless disputes between tax authorities and taxpayers. Once the fringe benefit is paid in kind, determination of the monetary value can be very subjective. It depends on the nature of each benefit, item by item, as well as the discretion of each tax official in each case.

On Nov 4, 2009, the Council of Ministers for Economics agreed that it was time for Thailand to have so-called infrastructure funds (IFFs) as proposed by the Finance Ministry. There is a strong belief that IFFS can stimulate the economy because they can mobilise money for major infrastructure projects such as expressways, railways, airports, telecommunication systems and alternative energy.

Modifying tax incentives as part of a series of transactions is similar to an effort to disentangle puzzle rings, leading to further complexity. The new tax rules, Royal Decree No.542 and Ministerial Regulation No.291, legislated two weeks ago are good examples.

On Nov 4, 2009, the Council of Ministers for Economics agreed that it was time for Thailand to have so-called infrastructure funds (IFFs) as proposed by the Finance Ministry. There is a strong belief that IFFS can stimulate the economy because they can mobilise money for major infrastructure projects such as expressways, railways, airports, telecommunication systems and alternative energy.

Modifying tax incentives as part of a series of transactions is similar to an effort to disentangle puzzle rings, leading to further complexity. The new tax rules, Royal Decree No.542 and Ministerial Regulation No.291, legislated two weeks ago are good examples.

With nearly 8.7 million user accounts, according to a global survey earlier this year, Bangkok has the largest city Facebook population in the world. Most users these days possess devices that allow them to be online anytime, anywhere, 24 hours a day. To enrich their online lives, countless applications both paid and free are at their fingertips from online digital media stores.